Editor: Marcy Lantz, CPA
A tax adviser provides critical advice and services to help clients wade through the chaos of a divorce and make a new start. Hopefully, throughout the process the client will begin to imagine what his or her post-divorce financial life can look like. Sometimes, however, a sense of limbo interferes with viewing the future in a realistic way.
After a divorce is finalized, the client must consider some key questions: What can I afford? How do I make my cut of the pie last? Will I be able to retire?
There is no better time than the present for clients to evaluate how they can make their new financial goals a reality while also ensuring that they have a plan to safeguard against potential pitfalls.
Here are the top five ways CPAs as trusted advisers can assist clients through this process.
Emphasize the importance of a sustainable budget
The first step in budgeting is to determine financial priorities. Encourage clients to honestly assess what is necessary versus unnecessary, and then work with the client to create a budget that he or she can stick to.
The division of income and the determination of new expenses can be overwhelming at first, but creating a budget can help clients be more strategic with their financial choices.
There are some great (and free) tools to help get this process started, such as Mint.com.
Practice tip: Taxes are a critical component to any budget. Bear in mind that the IRS considers individuals to be unmarried for the whole tax year in which their divorce or separate maintenance agreement is finalized (IRS Publication 504, Divorced or Separated Individuals).
Professionals can run tax projections that compare the different outcomes of filing as married filing jointly versus married filing separately (if the divorce or separation occurs after the end of the tax year) or single versus head of household to evaluate the most tax-efficient route. Also, it is necessary to carefully interpret the portions of the final divorce decree related to who can claim certain items on the tax return. It is better to settle these issues well before it comes time to prepare those filings. Avoiding big surprises through planning can help form and maintain long-lasting client relationships.
Help clients think about ways to mitigate risk
In addition to having a cash safety net of six months or so, clients should give thought to the insurance coverage changes that may have taken place as a result of the divorce and begin to think through whether they need to modify or replace any policies.
Navigating the world of insurance can be daunting, but the following types of coverage should be considered:
- Life insurance (income protection), especially if the divorced couple have children;
- Umbrella, homeowner's, or renter's insurance (property protection); and
- Health insurance (current employer, COBRA, or from a health care exchange).
Practice tip: Insurance coverage is not one-size-fits-all. As a trusted adviser, a CPA can make key referrals that can help solidify a client relationship. CPAs should refer clients to insurance advisers in their network who will guide — rather than sell to — clients, and complete a thorough evaluation and education process that provides an objective view, based on clients' specific needs.
Have critical discussions about retirement
Dividing retirement savings between the former spouses generally results in a less-than-rosy retirement picture. If your client originally had retirement planning prepared on a joint basis, it is critical to reassess the client's goals, assets, and overall plan.
Start by focusing on the client's current retirement savings. Discuss when he or she wants to retire and the lifestyle desired upon retirement. In this area, it may also be wise for the client to consult with other qualified advisers who can help determine how much is needed to meet his or her retirement goals.
Practice tip: Clients' allowable contributions to an individual retirement account (IRA) may change as a result of having a different tax filing status. Additionally, if a client does not have any compensation, he or she will be unable to contribute to a traditional or Roth IRA. Only taxable alimony is considered compensation for these purposes (IRS Publication 590-A, Contributions to Individual Retirement Arrangements (IRAs)). Clients who receive alimony whose divorces are finalized after Dec. 31, 2018, will need other earned income to qualify.
Do not forget estate planning and beneficiary designations
After the divorce paperwork and fees are settled, estate planning is a significant task that is commonly missed. Death is inevitable, and planning for it should not be an afterthought.
This is a critical time for clients to take a fresh look at wills, beneficiary designations, and the titling of property. It is important to ensure their wishes are known and can be carried out.
It is also important for clients to understand the process of probate and potential planning associated with trusts and estates. Many people are unaware of how many different planning avenues there are to protect their assets for potential beneficiaries, while maximizing tax savings.
Practice tip: Unchanged beneficiary designations and retitling delays can lead to assets and funds unintentionally ending up with an ex-spouse or other unintended parties. Court orders sometimes can correct these situations, but generally clients and their beneficiaries want to avoid complex probate issues.
Assist clients in creating a long-term plan
While a budget will help guide clients' short-term goals, a comprehensive financial plan will provide them a long-term road map that can last a lifetime.
A financial plan merges all the previously mentioned considerations and more. It is a valuable way for an adviser to understand a client's holistic financial picture. A financial plan must be tailored to meet each client's unique circumstances and objectives.
Practice tip: Clients need a long-term investment strategy to maximize their earnings potential while also factoring in their risk tolerance. As part of the financial planning process, professionals can review asset allocations and other intricacies of a client's portfolio. Having a strategy that aligns with the financial plan and risk tolerance is a powerful tool for helping clients feel more secure in their next steps.
When preparing to have a meeting or a phone call with a client to discuss these ideas, be ready for a difficult yet rewarding conversation. Divorce is one of life's most painful experiences, and clients might not have all the answers or feel ready to spend more money on professionals. It is critical for an adviser to educate clients and give them the information they need to make the best decisions for their unique individual needs. Having this conversation to remind clients of helpful planning steps will also solidify a CPA's role as a client's trusted adviser.
Marcy Lantz, CPA, CSEP, is a partner with Aldrich Group in Lake Oswego, Ore.
For additional information about these items, contact Ms. Lantz at 503-620-4489 or email@example.com.
Unless otherwise noted, contributors are members of or associated with CPAmerica Inc.